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Director'sDuties in UK Corporate
Acquisitions
SALVATORE PROVIDENTI*
Outline
I. Introduction
II. Legal duties of directors and their relevance for corporate acquisitions
A. Establishing the relationship between legal rules and rules of the
market
B. General overview of the relevant legal rules
1. Fiduciary duties and their enforcement
2. Evolution of the duties of care, skill and diligence
3. The 'unfair prejudice' remedy
4. Other relevant sections of the Companies Act 1985: liability,
removal of directors and disclosure of any payment
III. The time of disclosure as a rule of fairness
A. The general problem
B. Duties of the offeror's directors
1. General obligation to disclose and its practical implementation
by the Listing Rules, the Admission and Disclosure Standards
and the City Code
2. Special rules concerning the 'announcement of a firm intention
to make an offer'
3. The duty to make only serious announcements
4. 'Last words': the deadlines for the offer and its revision
C. Duties of the target's directors
1. General rule of disclosure and the fiduciary duties
2. The possible period of silence
Division of Legal Counsel, Commissione Nazionale per le Societi et la Borsa (Consob),

Italy. Research for this paper was undertaken during an academic visit at the Faculty of Laws,
University College London, under the advice of Ben Pettet, to whom the author is grateful for
his suggestions and comments. The author is also grateful to Guido Ferrarini, Alfredo
Macchiati, Giuseppe Cannizzaro, Marcello Bianchi, Elena Pagnoni and, for their kind hospi-
tality, Rodney Austin and the Dean of the Faculty, Prof. Jeffrey Jowell. The author further
benefited from discussions with Sarah Worthington and Christos Hadjiemmanuil, both of the
Department of Law at the London School of Economics, Noel Hinton, of the Panel on
Takeovers and Mergers, and Barnabas Reynolds, of Freshfields.
192 Salvatore Providenti
IV. The approval of the shareholders as a rule of fairness
A. When disclosure is not enough: the need for shareholders' approval
in company law
B. Approval of the acts of the offeror's directors in the Listing Rules
C. Approval of the acts of the target's directors in the City Code: the
passivity rule
1. Scope of the passivity rule
2. Relevant period
3 Special rules for the adoption of the resolution
V. Concluding remarks
1. Flexibility of the rules concerning the timing of disclosure
2. Shareholder approval as a rule of fairness
3. General rules and detailed rules
4. Company law and securities regulation
I. INTRODUCTION
UK regulation affecting the duties of fairness owed by the directors to the

shareholders of a company involved in a corporate acquisition is the main
topic of this paper. The paper focuses on two core aspects of corporate
acquisitions: the time of disclosure of the (agreed or proposed) deal and the
actions of the directors, related to the deal, which must be approved by the
shareholders. 1 The aim is to clarify the contents of the relevant rules and
analyse the cases, in order to understand their rationale. The rules
contained in the Listing Rules, originally issued by the London Stock
Exchange and recently broadly confirmed by the Financial Services
Authority (FSA) 2 ('Listing Rules') and the rules contained in the City Code
on Takeovers and Mergers ('the City Code'), together with some relevant
rules of company law, are considered for this purpose.
In particular, in view of the fact that the rules issued by the market regu-
lators set constraints on the freedom of action of company directors, it
1 There are, of course, many other aspects of a corporate acquisition that are interested
by rules of fairness binding the behavior of the directors, especially provided by the City Code
on Takeovers and Mergers; see, e.g., rules 3, 4, 16, 24 and 25 of the Code.
2 The Official Listing (Change of Authority) Regulations 2000 designated, with effect
from 1 May 2000, the FSA as UK's Listing Authority, in replacement of the London Stock
Exchange; the statutory provisions on the functions of the UKLA may now be found in the
Part. VI of the Financial Services and Markets Act 2000, which has replaced the Part IV of the
Financial Services Act 1986. A consequence of the change of the competent authority for the
official listing of securities is a distinction between admission to listing, which is the
Authority's responsibility, and admission to trading, which is done by the Exchange. The two
procedures, however, will be performed together and, as confirmed by the Listing Rules and
the Admission and Disclosure Standards of the London Stock Exchange it will not be possible
to have listed securities not admitted to trading and traded securities not admitted to listing.
Director'sDuties in UK CorporateAcquisitions 193
would be useful to highlight their relationship with the standing company
law rules concerning the duties of directors. It is not always easy to under-
stand if the two systems of norms are governed by the same general princi-
ples. An attempt to give first answers to this puzzle could be useful,
especially if, as a result of the eventual national implementation of the draft
European Directive on tender offers, the3 law comes to play a more impor-
tant role in the regulation of takeovers.
II. LEGAL DUTIES OF DIRECTORS AND THEIR RELEVANCE FOR CORPORATE

ACQUISITIONS
A. Establishing the relationship between legal rules and rules of the

market
We could consider several rules present in the Listing Rules or in the City
Code as extensions of the judicial and legislative English experience relat-
ing to the determination of the duties of directors and the means of defence
of an oppressed minority. The background of General Principles 8 and 9 of
the City Code, for example, concerning the proper conduct of directors
during an offer, does not seem very different from the basic assumptions
founding the common law construction of the fiduciary duties owed by the
directors to the company. We can find in General Principle 8 'good faith'
and 'oppression of a minority' as the respective qualifications of good or
bad behaviour of the controllers, while in General Principle 9 we read that
any commitment with the offeror 'may ... result in a breach of the direc-
tors' fiduciary duties'.
On the other hand, the rules of the market regulatory bodies could be
seen as a response to the apparent difficulty of using the instruments avail-
able in common or statute law for the protection of the shareholder's inter-
est in litigation regarding the wrongdoing of the directors of listed (i.e.,
large public) companies.
The second sentence of the Introduction to the General Principles of the
City Code appears to emphasise that the constraints on the behaviour of
directors who respect the Code go beyond a simple requirement to respect
their strict legal duties.4 This principle has been used by the Panel, in a
3 On this aspect, see B. Pettet, 'Self Regulation v. Public Regulation: The Future with the
Directive' [2000] European Business Law Review.
4 'While the Boards of an offeror and offeree company and their respective advisers have
a duty to act in the best interests of their respective shareholders, these General Principles and
the ensuing rules will, inevitably, impinge on the freedom of action of boards and persons
involved in offers; they must, therefore, accept that there are limitations in connection with
offers on the manner in which the pursuit of those interests can be carried out.'
statement, for the purpose of refuting an allegation, made by the target
company, to the effect that the pursuit of proceedings against the offer (by
way of an antitrust action in the US) was a consequence of the legal duties
of directors. The Panel considered the pursuit of the proceedings to be
inconsistent with the 'passivity rule' established by General Principle 75 and
held that 'the action which may be taken by directors in fulfilment of their
duties can be limited by the Code'. Nevertheless, the analysis of the specific
case confirms that the background of the statement of the Panel is not far
6
removed from the rationale of the common law rules.
This is proof that one cannot realistically exclude the possibility of
conflict between legal rules and rules of the market. We may find that some-
times what is deemed to be unfair under the City Code or the Listing Rules
would not be considered improper or found to have caused an 'unfair prej-
udice' by a court of law. For this reason, we cannot hope to establish any
general theories concerning the relationship between the legal duties of
directors and the market rules regarding their behaviour in a corporate
acquisition. We should rather use the legal duties as a background consid-
eration for the analysis of market rules, verifying on a case-by-case basis
whether there is coherence or opposition. In this sense, it could be useful to
briefly look into the cornerstones of English law on the duties of directors
and the enforcement of these duties, with the aim of showing which of the
standing general rules may produce effects in the context of a corporate
acquisition.
B. General overview of the relevant legal rules
1. Fiduciaryduties and their enforcement

Because of the traditional Equity approach, one of the most important fidu-
ciary duties of the directors has been the duty to act with honesty and good
faith. The effectiveness of this duty needs (i) clarity regarding its contents
and (ii) the availability of a legal remedy against breaches.
The number of judicial decisions clarifying the meaning of honesty and
good faith is too vast for the objectives of this investigation. It is possible,
however, to discern from the whole line of decisions some general princi-
5 'At no time after a bona fide offer has been communicated to the Board of the offeree
company, or after the board of the offeree company has reason to believe that a bona fide offer
might be imminent, may any action be taken by the board of the offeree company in relation
to the affairs of the company, without the approval of the shareholders in general meeting,
which could effectively result in any bona fide offer being frustrated or in the shareholders
being denied an opportunity to decide on its merits.' The 'passivity rule' will be more closely
examined in section JV.C.
6 The offer was made by Minorco Plc for Consolidated Gold Fields (Consgold) Plc and
the statement was decided on 9 May 1989. See L. Rabinowitz et al. (eds), Weinberg and Blank
on Takeovers and Mergers (loose-leaf), pp. 10036 ff.
pies, which may be applicable in corporate acquisitions. Obviously, the
courts have historically considered the duty of honesty and good faith to be
breached by the performance of ultra vires acts (i.e., acts that the memo-
randum of association or the contracts of service exclude from the activity
of the directors). An important present-day evolution has been the classifi-
cation of the use of powers arising from the articles of association for
'improper purposes' as a breach of fiduciary duties.
The 'proper purpose' rule establishes something that is not far from the
'passivity rule' in takeover regulation, as reflected in the City Code.
Actually, one of the traditional 'improper purposes' found by judges in the
behaviour of the directors is their interference in the market for corporate
control, by means of issuance or allotment of shares, increases in their
salary or benefits for loss of position. 7 The verification of such interference
in the relevant decisions has normally been made on the basis of an objec-
tive test, without any particular examination of the subjective primary
intention of the directors or of the eventual correspondence of their action
in favour or in opposition of a takeover to the interest of the company:
simply, it has been considered improper for directors to have had the final
word on the outcome of the proposed transaction.
Two leading judicial decisions, Foss v. Harbottle (1843)8 and Percival v.
Wright (1902), 9 heavily restricted the actions available to shareholders for
the enforcement of the fiduciary duties of company directors. The rule in
Foss v. Harbottle allows only the majority of the company to bring an
action for the breach of the bona fide duties of the directors (also called the
majority rule, as in other European countries); the latter case refutes the
existence of fiduciary duties that the directors owe directly to the share-
holders. Both rules are essentially based on the identification of the
company alone, and not of the shareholders, as the principal to which the
directors are bound by special requirements of good faith, arising directly
from the company's articles of association.
Although these two rules are still active, the common law has created some
important exceptions, which have strengthened the position of minority
shareholders. The exceptions to the rule in Foss v. Harbottle are essentially
based on the acknowledgement of the possibility of oppression of the minor-
ity, where the alleged wrongdoers are in control of the company and the
plaintiff can present evidence of a fraud. 10 The rationale for this exception is
7 The leading cases are probably Hogg v. Cramphorn Ltd [1967] Ch. 254 (actually
decided in 1963) and Howard Smith Ltd v. Ampol Petroleum Ltd. [1974] AC 821. More
recently, the 'proper purpose' doctrine has been applied in Lee Panavision Ltd v. Lee Lighting
Ltd [1992] BCLC 22 (CA). See A.J. Boyle and R. Sykes (eds), Gore-Browne on Companies
(loose-leaf), p. 27.013.
8 (1843) 2 Hare 461. 9 [1902] Ch. 421.
10 On the meaning of 'fraud on the minority', see L.C.B. Gower, Principles of Modem
Company Law (5th ed., 1992), pp. 593-605.
inherent in the theory used by the courts when they confirm the majority
rule. The judges do not allow a derivative action to be brought by a single
shareholder, because the owners of the majority of outstanding voting
shares agree with the acts of the directors and are ready to ratify their
actions on behalf of the company. This rationale for refusing a derivative
action cannot be applied, however, where the behaviour of the directors
cannot be ratified by a general meeting. This situation occurs, according to
the opinion of the courts, when the action is brought by a majority of share-
holders, but also when the owners of the majority are part of the directors'
wrongdoing, in which case their behaviour assumes the characteristics of a
'fraud on the minority'.
This important exception has been limited by a further condition: the
consent of the majority of independent shareholders to the derivative
action, which is required by the courts following the decision in Smith v.
11
Croft (No 2). For this reason, today 'fraud on the minority has been
12
largely subsumed in the statutory wider concept of 'unfair prejudice",
established by section 459 of the Companies Act, which is often more easily
usable (see below, section II.B.4).
The rule in Percival v. Wright, for its part, has been laid aside in cases
concerning mergers, acquisitions and issues of shares, which represent the
typical situations in which the. behaviour of the directors can directly affect
the interests of the shareholders. In particular, the rule was established in a
case in which the shareholders, by selling their securities to the directors,
had played an effective role in causing damage to themselves. 13 There have
been more recent decisions where the court has indeed recognised a fidu-
ciary obligation of the directors to exercise their powers in the interests of
both the shareholders and the company. This different rule has been used in
the context of a takeover offer, when the position of a director relative to
the shareholders becomes similar to that normally arising by virtue of a
relationship of agency; in such a situation, the courts have established the
duty of directors to inform their shareholders fully and correctly, accepting
the possibility of an action by shareholders against the directors where the
14
latter do not respect this obligation.
Moreover, where the shareholders of a listed company alleged that a
decision of the directors had determined the prevalence of an offer over the
higher competing one and sued to prevent the implementation of the offer,
11 [19881 Ch. 114. For criticism of this rule, see P. Davies, Gower's Principlesof Modern
Company Law (6th ed., 1997), pp. 673-676.
12 Gower (5th ed.), op. cit., n. 10, p. 594.
13 They had proposed to the directors the selling of their shares and, after the acquisition,
the directors sold all the shares for a higher price; the alleged breach was the lack of informa-
tion about the possible better deal.
14 See Gethingv. Kilner (1972), as reported in Gore-Browne on Companies,op. cit., n. 7,
p. 27.006. In the same way, Dawson Internationalplc v. Coats Patonsplc (1988) 4 BCC 305.
the Court of Appeal confirmed Foss v. Harbottle, but at the same time
affirmed a right for action for shareholders who suffered a loss and can
show that the directors decided without regard for their interest. 15 Thus,
acting 'in their own right, and not in the right of the company ... any one
or more of the ... shareholders' can stop the implementation of the offer
or 'sue such directors in order to recover the benefit of their own individ-
ual pockets the difference between the take-over value per share which they
are constrained to accept and the higher take-over value which they lost the
chance of accepting'.
The existence of a kind of fiduciary obligation towards the shareholders
has been confirmed in cases of allotment of shares for reasons other than
the simple capitalisation of the company: in these cases the duty of the
directors not to allot shares for improper purposes was thought to be owed
to the shareholders. 1 6 In other cases, even though they confirmed that the
directors owe fiduciary duties to the company and not to individual share-
holders, the judges have decided that the directors, in advising shareholders
on a bid, 'have a duty to advise in good faith and not fraudulently, and not
to mislead whether deliberately or carelessly ... based on the ordinary prin-
17
ciples of law'.
In short, it is clear that the 'proper purpose' doctrine and the related
caselaw provide significant rights of action for the benefit of the share-
holders in the event of a corporate acquisition, especially if this is being
brought about by means of a takeover offer.
2. Evolution of the duties of care, skill and diligence

Another important step in the evolution towards the protection of the
company and the shareholders has been the recent rejection of the tradi-
tional, almost non-professional, understanding of the job of a company's
directors. 18 Traditionally, 'heavy duties of loyalty and good faith' were
linked with 'light obligations of skill and diligence'. 19 The change in insol-
vency law, in the form of the introduction of a restricted duty of skill by
section 214 (4) of the Insolvency Act 1986, has essentially led the courts to
new positions, the main element of which is that a director must act as
15 Heron InternationalLtd v. Lord Grade [1983] BCLC 244.

16 See the cases quoted supra, n. 14; and also Re a Company [1987] BCLC 82; and John
Crowther Groupplc v CarpetsInternationalplc (1990), cited in Gore-Browne on Companies,
op. cit., n. 7, pp. 27.006 and 27.013.
17 Dawson Internationalplc v. Coats Patonspic (1988) 4 BCC 305. See A. Hicks and S.H.
Goo, Cases and Materials on Company Law (1994), p. 620.
18 As established by the historical landmark decision in Re City Equitable Fire Insurance
Co. [1925] Ch. 407, where it was famously found that 'a director need not exhibit in the
performance of his duties a greater degree of skill than may reasonably be expected from a
person of his knowledge and experience'.
19 Davies, Gower's (6th ed., 1997), op. cit., n. 11, p. 640.
Salvatore Providenti
a reasonably diligent person having both:
(a) the general knowledge, skill and experience that may reasonably be expected of
a person carrying out the same functions as those carried out by that director in
relation to the company, and
(b) the general knowledge, skill and experience, that that director has.
The behaviour of the directors is thus analysed by means of a test based
primarily on an important objective standard of evaluation, while the
second criterion, which points to the director's subjective sphere, becomes
in practice merely an integrative provision.
The use of this test can be seen as the law in force concerning the duties
of care, skill and diligence of company directors. 20 Probably, its explicit
extension to matters other than insolvency will be undertaken in the near
future through an overhaul of the statutory provisions concerning directors;
this appears to be the government's intention, as shown in recent consulta-
tion documents 21 .
For the moment, the general use of minimum standards of conduct for
directors of companies, consistent with market and community expecta-
tions, is facilitated by other statutory provisions concerning crisis situa-
tions, namely, sections 6-9 of the Company Directors Disqualification Act
1986 (CDDA), establishing that directors 'unfit to be concerned in the
management of a company' must be disqualified for two years by decision
of the court. The events that might demonstrate unfitness can also occur
without insolvency (section 9), and concern the behaviour of all kinds of
directors (executive and non-executive; senior and junior; irrespective of
whether or not they are employees of the company). Several recent CDDA-
related cases have added to the Insolvency Act-based dual test 'an empha-
sis on internal control and an explicit account of director's supervisory
functions' .22
20 Such an assessment has been recently used, e.g., by Hoffmann J. in the cases Norman
v. Theodore Goddard[1991] BCLC 1027 and Re D'Jan of London Ltd [1994] 1 BCLC 561.
Their importance is strongly evidenced in recent documents of DTI concerning the reform of
company law. See, e.g., Company Law Review Steering Group, consultation document,
'Modem Company Law for a Competitive Economy: The Strategic Framework' (February
1999), para. 7.16 and Ann. H. The first change in the position of the courts was realised in
Dorchester Finance v. Stebbing [1989] BCLC 498 (actually decided in 1977). See Davies,
Gower's (6th ed., 1997), op. cit., n. 11, pp. 641-642.
21 Proposals concerning a possible statutory provision on duties of care can be found in
the consultation document cited in the previous note; and, more clearly, in Department of
Trade and Industry, consultation document 'Company Directors: Regulating Conflicts of
Interest and Formulating a Statement of Duties' (1998), Part 15.
22 A. Walters, 'Director's Duties of Care, Skill and Diligence: The Impact of the Company
Directors Disqualification Act 1986', draft distributed during a lecture delivered at the
Institute of Advanced Legal Studies, University of London, on 29 November 1999, p. 29. The
mentioned recent cases are Re Barings (No 5) [1999] 1 BCLC 433; and Re Landburst Leasing
plc [1999] 1 BCLC 286. See also Bishopgate Investment Management Ltd v. Maxwell (No 2)
[1993] BCLC 1282.
Director'sDuties in UK CorporateAcquisitions
3. The 'unfairprejudice' remedy

With regard to the statutory framework, an improvement in the protection
of shareholders has been achieved through the 'unfair prejudice' remedy of
sections 459-461 of the Companies Act 1985, as partially substituted by
the Companies Act 1989. The 1989 Act stated that an 'unfair prejudice'
petition can be presented also for acts or conduct unfairly prejudicial to
members generally considered, and not only to a minority.
The 'unfair prejudice' petition can be seen to be the simplest legal instru-
ment for bringing to the courts a complaint on behalf of shareholders
against the directors or controllers. 2 3 If the court considers the allegations
to be well founded, it 'may make such order as it thinks fit for giving relief
in respect of the matters complained of' (s. 461(1)). Section 461 (2) indi-
cates some of the possible contents of the order-for example, the purchase
of the shares of the prejudiced members at a fair price; the possibility of a
winding up (but only after complying with the requirements concerning
advertising 24 ); the authorisation (very rare in the practice) of a derivative
action on behalf of the company. The first is the order most commonly
asked for by petitioners. It is interesting to note that sometimes, for small
companies facing serious financial difficulties, the court may consider wind-
ing up to be more equitable than a forced acquisition of the shares.
Nevertheless, the courts are very careful in applying the 'unfair prejudice'
remedy to listed companies. In such companies, it has been found that there
is less personal interest in the conduct of the company; for this reason, it is
very difficult to identify 'legitimate expectations' of the members that could
justify special protection with the external help of the judges. This approach
can sometimes lead to the protection of the interest of shareholders in
general against the recognition of privileges in favour of single sharehold-
ers. 25 The methods used by courts in order to strike out the petitions in the
rare cases concerning public and listed companies limit the usefulness of
section 459 as a means for enforcing in such companies secret agreements
or contested special rights, which are not set out in the articles of associa-
tion. They do not deny, however, the possibility of using the remedy.
On the other hand, it has been found that the 'unfair prejudice' remedy
cannot be used as a means of enforcement for breaches of the market
rules. 26 This position represents a confirmation of the separation of
23 See D.D. Prentice, 'The Theory of the Firm: Minority Shareholder Oppression: Sections
459-461 of the Companies Act 1985' (1988) 8 Oxford Journalof Legal Studies 55, in partic-
ular p. 78.
24 See Re Full Cup InternationalTrading Ltd [1995] BCC 682.
25 Re Blue Arrow plc (1987) 3 BCC 618: in this case the striking out of the petition was
substantially in the interest of the investing public.
26 See Re Astec (BSR) plc [1999] BCC 59, where Parker J. said that 'members of the
public buying shares in a listed company could expect that all relevant rules and code of prac-
regimes: The courts retain the power to decide on the existence or otherwise
of actual prejudice and unfairness, even if the market's rules have been
breached. On the other hand, the rules of the market are autonomous from
the legal rules and specific means are used for their enforcement.
One cannot exclude the possibility that the remedy could be used for a
'breach of the articles, breach of directors' duties or other illegality' in
public companies, 2 7 especially in the presence of exceptional breaches,
provided that the special test concerning the existence of prejudice and
unfairness is satisfied. In applying this test, the analysis of non-compliance
28
with market rules will be, in any event, useful and probably inevitable.
Furthermore, the legislator's intention is to include public companies in
the scope of the 'unfair prejudice' remedy, as shown by the above-
mentioned change introduced by the Companies Act 1989, which substan-
tially allows the use of the remedy in the relationship between directors and
shareholders-something which previously was seriously doubted. In
public listed companies, if there is no controlling shareholder, this relation-
ship is the most important source of complaints on the part of the investors
regarding the conduct of the undertaking.
4. Other relevant sections of the Companies Act 1985: liability,removal

of directors and disclosure of any payment
To complete this brief overview of the statutory rules concerning directors'
duties, we must note that the provisions of the Companies Act 1985
concerning directors comprise essentially rules regarding their appointment
or removal (Part IX, ss 282-310) and the disclosure of their dealing activi-
ties and their pay (Part X, ss 311-347). There are, nevertheless, two provi-
sions that concern the matter of the fiduciary duties owed to a company by
its directors.
The first is section 309, whose probable effect is to add to the fiduciary
duties of the common law a new duty created by Parliament: to have regard
to 'the interests of the company's employees, in general, as well as the inter-
ests of its members'. This duty, as provided by subsection (2), is owed to the
company and 'is enforceable in the same way as any other fiduciary duty
owed to the company by its directors'. The latter clause can be read as an
indirect statutory confirmation of the legal strength of the 'other fiduciary'
duties established by common law.
The second, and most important, provision can be found in section 310.
tice would be complied with in relation to the company, but that expectation could not rise to
an equitable constraint on the exercise of legal rights conferred by the company's constitution
(of which the Listing Rules, City Code and Cadbury Code formed no part) so as to found a
petition under s. 459'.
27 See Gore-Browne on Companies, op. cit., n. 7, p. 28-031.
28 The ratio of Re Astec [1999] BCC 59 contains a similar analysis.
This declares void any provision 'whether contained in a company's articles
or in any contract with the company or otherwise, for exempting any offi-
cer of the company or any person (whether an officer or not) employed by
the company as auditor from, or indemnifying him against, any liability
which by virtue of any rule of law would otherwise attach to him, in respect
of any negligence, default, breach of duty or breach of trust of which he
29
may be guilty in respect to the company'.
Some of the other relevant statutory norms in force might be of signifi-
cance in a takeover context. Among them is section 303 on directors'
removal by ordinary resolution of the company and section 314 on disclo-
sure of any compensation arrangement between the offeror and a director
of the target company (cf. rule 24.5 of the City Code). Finally, the rules on
the interested dealings of directors (ss 320-322A) can be important for
understanding the rationale of certain special rules of takeover regulation
(see below, section IV.A, where the rules are further discussed).
III. THE TIME OF DISCLOSURE AS A RULE OF FAIRNESS
A. The general problem

The problem of the determination of the best time for disclosure of a bid
concerns the relationship between shareholders and directors, both of the
acquiring company and of the target company.
When the acquisition is the result of a private deal, the information could
normally be given by the directors of the offering company after the conclu-
sion of the agreement with the counterparty; but, as we shall see, in certain
circumstances such agreement must be conditional on the approval of the
shareholders of the acquiring company. If the acquisition is the result of a
public deal--especially of a takeover offer, but also, for example, of the
participation in a public auction-the proper conduct of the market
depends on information being made available before the acquisition is
completed, and probably from the very first step.
When approached by potential buyers of the total amount or a relevant
part of the capital of their company, the directors of a target company are
affected by the problem of disclosing information to the market. In such
case, their contractual position is suddenly transformed from being agents
of the company to being agents also of the shareholders, who are the real
counterparties of the potential buyer.30 Consequently, they must inform
29 For a discussion of the limits of applicability of this section (also with respect to possi-
ble exceptions), see Davies, Gower's (6th ed., 1997), op. cit., n. 11, pp. 623 - 626.
30 The singularity of the situation allows the overcoming the traditional doubts concern-
ing the possibility of qualifying the shareholders as principals of the directors. See the judicial
decisions quoted supra, nn. 14 through 17.
their shareholders as soon as possible about the existence of the opportu-
nity, but they also need to be careful not to damage the completion of the
operation, as well as to avoid the creation of false expectations. The latter
problem (the risk of false expectations) does not only affect the relationship
between directors and shareholders; it further relates, in a listed company,
to the proper conduct of the securities market and the risk of market
manipulation. Finally, the directors often face a problem of conflict of inter-
ests, if they disagree with the strategy of the potential future controller.
Moreover, there are some situations where one could speak of 'cross-
reference'. Thus, the directors of a company which has decided to launch a
takeover offer may need to consider the interest of the shareholders (and
potential investors) of the target company, whenever there is serious risk of
creation of a false market or of disparity of information between the two
categories.
B. Duties of the offeror's directors
1. General obligation to disclose and its practicalimplementation by the

Listing Rules, the Admission and Disclosure Standards and the City
Code
The directors of a listed company which has acquired or prepares to acquire
another company are bound, for all relevant operations, by the general rule
of disclosure. This is one of the cornerstones of the good and fair conduct
of regulated markets.
The rule is set out in section 9.1 of the Listing Rules, in terms almost iden-
tical to those of Schedule C of the European Directive 79/279 concerning list-
ing requirements, 31 which they implement in the UK, pursuant, formerly, to
section 153 of the Financial Services Act 1986 and, as things now stand, to
section 74 (4) of the Financial Services and Markets Act 2000.
In the case of an acquisition which, by reason of its worth or nature or
simply because this is the opinion of the directors themselves, could affect
the price of the securities issued by the company, the puzzle arising from
this rule is to determine the point at which the operation must be publicly
announced, having become a 'development' in the sphere of activity of the
company which requires mandatory disclosure. A combined reading of
chapters 932 and 10 of the Listing Rules and of rule 2 of the City Code can
31 The company must inform the public as soon as possible of any major new develop-
ments in its sphere of activity which are not public knowledge and which may, by virtue of
their effect on its assets and liabilities or financial position or on the general course of its busi-
ness, lead to substantial movements in the prices of its share.'
32 The obligations imposed by para. 9 of the Listing Rules are also found in section 3 of
Part 2 of the Admission and Disclosure Standards of the London Stock Exchange, which, from
the IST of May 2000, regulate the admission of securities to trading.
Director's Duties in UK CorporateAcquisitions 203
help us to solve the puzzle; one lesson of such reading would be that there
is substantial identity of spirit between the rules issued by the two market
authorities.
In general, the obligation provided by the Listing Rules arises when the
'development' happens, and this moment does not necessarily coincide with
the closing of the operation. Nevertheless, in an operation prepared
through reserved talks and negotiations, the obligation is clearly waived
(rule 9.4 of the Listing Rules and section 3.4.of the Admission and
Disclosure Standards) until the agreement on the terms is completed,
provided that the directors and other persons involved (in a restricted
number and in a capacity specifically indicated by rule 9.5 and section 3.5)
are confident of their capacity to ensure secrecy throughout the critical
period. If these persons consider that the segregation of information is or
can be breached, with possible effects on the price and on the regularity of
the market, they must keep the authorities and the investors informed
(through the Company Announcements Office) 'without delay', although
they can 'at least' release only a 'warning announcement' that 'the company
expects shortly to release information'.
If the operation is a transaction in the sense of chapter 10 of the Listing
Rules, that is, mainly if it consists in an acquisition or disposal of assets,
further disclosure will be imposed by the rules of chapters 10 and 11 'with-
out delay after its terms are agreed' (rule 10.31).33 Evidently, 'agreement on
terms' does not mean that the related contract has been signed or the deal
closed, but only that the main aspects of the operation have been decided,
while a maximum level of disclosure
34
is provided for 'Class 1 transactions'
and for 'reverse takeovers'.
With respect to information contained in the circulars, if the transaction
is a takeover offer, the Listing Rules regulate by means of special provisions
the kinds of dates relating to the financial effects of the aggregation that the
35
circular must expose.
The City Code (rule 3.2) adds that, when the offer is a reverse takeover
(or when the directors of the offeror are faced with a conflict of interests as
a result of an interest in the affairs of the offeree 3 6), competent independent
advice is necessary, whose 'substance must be made known' to the share-
holders of the offeror company.
33 Only the FSA Listing Rules regulate this special matter.

34 See infra, section IV.B.
35 See ss. 10.45-10.47.
36 'A conflict of interest will exist, for instance, when there are significant cross-share-
holdings between an offeror and the offeree company, when there are a number of directors
common to both companies or when a person is a substantial shareholder in both companies'
(note 3 of rule 3.2.).
2. Special rules concerning the 'announcement of a firm intention to

make an offer'
When a takeover operation can be realised only through public negotia-
tions, the general rule of disclosure would theoretically require that an
announcement should be made when the decision to carry out the opera-
tion is taken, because at that moment there is a 'development'. A trace of
this principle of immediate obligation to disclose is present in the rules and
practice of the City Code, in the form of a general principle supporting the
37
surveillance of the behaviour of offeror and offeree companies.
Nevertheless, where in the run up to a takeover bid the directors of the
potential bidder are seriously interested in ensuring the consent of the direc-
tors of the target, the rules also provide time for reserved talks on the
proposed deal between them, before the former decide whether or not to
announce a firm intention to make an offer. We can assume that, normally,
in such a case the effective terms of the offer will be decided by the offeror
only after the talks have finished.
Rule 2.2 of the City Code allows the directors of both companies to
remain silent, but imposes tight limits on the circle of persons obtaining the
information and potential leaks or circulation of rumours. If these restric-
tions are not respected, the directors of the target company (but not the
offeror) can satisfy the obligation also through an announcement that 'talks
are taking place'. The rule presents important similarity with the afore-
mentioned rules 9.4 and 9.5 of the Listing Rules, but with a narrower space
for silence. Actually, respecting rule 2.2, the directors must make an
announcement or, at least, consult the Panel (letters c and d) also when
there are only 'rumour or speculation' in the market or when the number
of informed persons increases. The Listing Rules always mention the exis-
tence of possible effects on the price as a condition which triggers the duty
of disclosure, and define the persons that can be informed of the talks prior
to disclosure only by reference to their profession, without express atten-
tion to their number. The minimum required content of the 'warning'
announcement is that 'talks are taking place' (rule 2.4 City Code). This
seems to be go somewhat further than a statement to the effect 'the
company expects shortly to release information [which may affect the
price]', as allowed under rule 9.4 of the Listing Rules.
In respect of rule 2.3 of the Code, it is important to note that if the
bidder chooses to try to reach agreement with the target's directors before
launching its offer, it thereby passes on to the latter, as persons primarily
responsible for the information of shareholders, the duty of verifying if an
announcement is required. This could be a (slight) incentive in favour of
37 See, e.g., rule 23 of the Code.

agreed bids. If the directors of the offeror are less inclined to co-operate, or
if they suddenly interrupt the talks in order to go ahead with their opera-
tion, rule 2.2 (a) requires them to make a public announcement when they
communicate to the board of the target a firm intention to make an offer.
Thus, the rule does not deny to the offeror a period of silence about its
intentions following the moment in which the decision to launch a bid is
taken. The limits of this 'right' of silence are the same (pursuant rule 2.2 of
the Code) as those in the situation where talks are in course. The difference
is that in this situation the directors of the offeror and its advisers must pay
special attention to rumours and the conduct of the market in the relevant
shares. The practice of the Panel suggests that respect for this rule seems to
be closely monitored and has been enforced in some important cases. The
operators usually found guilty of breach of the rules concerning the timing 38
of the announcement tend to be the professional advisers of the offeror.
Faced with a unilateral (i.e. not previously agreed) takeove; the terms of
the operation can be considered 'agreed' (with the effects regarding disclo-
sure established primarily by the Listing Rules) when the details of the offer
are established by the offeror, but the exact determination of this moment
remains essentially in the hands of the latter. Both sets of market rules-and
the City Code in particular-allow this room for manoeuvre, but aim to
increase the possible liability of the directors and of their consultants if it is
improperly used. Such liability is not, of course, strictly legal but can lead
to the imposition of sanctions on the part of the market authorities.
3. The duty to make only serious announcements

The duty of seriousness is imposed by General Principle 3 of the City Code
and transformed into a corresponding power of the directors of the target
company by rule 1 (c) of the Code. The former clarifies that 'an offeror
should only announce an offer after the most careful and responsible
consideration'; the offeror and its financial advisers must have 'every reason
to believe that it can and will continue to be able to implement the offer'.
The latter gives to the board of the offeree, when this is approached by an
offeror, the entitlement 'to be satisfied that the offeror is, or will be, in a
position to implement the offer in full'.
The analysis of two statements of the Panel concerning compliance with
the principle of seriousness of the announcements 3 9 can lead to a better
understanding of the rules. The Panel first clarified the main aims of the
provisions as follows: 'General Principle 3 attempts to reduce to a minimum
38 As revealed, e.g., by the decision taken in Petrocom Group pldjames Wilkes plc (1992).
39 The statements concern the 'Proposed offer by W. M. Low and Co. PLC for Budgens
PLC' (1 August 1989), and the 'Proposed offers by Luirc Corp. for Merlin International
Properties Limited.' (1 May 1991). The statements can be found in Weinberg and Blank, op.
cit., n. 6, pp. 10013 and 10127.
the number of offers which are withdrawn by placing upon potential offers
and their advisers an obligation to exercise due care before making an
offer.' 40 Later, the statements confirm that the principle constitutes a rule of
fairness, imposing certain duties on directors and their consultants: 'It is a
duty to display that standard of skill and care which would ordinarily be
expected of someone exercising or professing to exercise the particular skill
41
in question.'
We can compare this standard with the test for the requisite skill and
care of directors, as established in recent judicial pronouncements and
inspired, as we have already seen (section II.B.2), by the insolvency regula-
tions. Both standards are based on an objective test. In the Panel statement
this test consists in what may 'ordinarily be expected of someone exercising
or professing to exercise the particular skill in question'; in the recent judi-
cial decisions, it consists in what 'reasonably may be expected of a person
carrying out the same functions as are carried out by that director in rela-
tion to the company'.
The objective definitions of the two standards establish very similar
rules; the difference in wording can be attributed to the larger range of situ-
ations in which the Panel provision is applicable, affecting not only the
directors but also the advisers and auditors of the company. The most
important element that the two definitions share is the relevance of the
particular function or particular activity exercised by the person concerned.
This means, for example, that a director carrying on executive functions
relating to the financial affairs of the company will be expected to have
excellent financial skills, while a financial adviser endorsed by the company
as a consultant will be expected to show the level of care and skill typical
of the industry to which he belongs-normally corresponding to the best
professional standards of the industry.
Nevertheless, the direct reference in the Panel statement to the 'skill'
exercised or professed allows the Panel to nail the adviser for any specific
failures: he is appointed to offer advice in a specific operation and, for this
reason, he must possess not only excellent generic financial skills but also
the special skills needed, for example, in a corporate acquisition deal or for
the preparation of a takeover offer.
The rule underlying the General Principle and partially specified by rule
1 (c) is essentially a rule of fairness, and is consequently general and
abstract. The aforementioned statements of the Panel individuate the
abstract rule in two different particular situations. The narrower rules laid
down by the two cases can be expressed as follows:
40 The sentence is extracted by the statement of the Panel concerning W.M. Low/Budgens
PLC, ibid., p.6. The same words can be found in the other statement.
41 W.M. Low/Budgens, ibid., p. 7.
Director's Duties in UK Corporate Acquisitions 207
" When an offeror is heading towards a recommended offer which,
because of its size or for other reasons, requires authorisation by the
general meeting of its shareholders, the directors and their advisers must
ensure that they announce the offer only if they have all the information
that they need to be able to recommend that the general meeting give a
positive vote (rule arising from the W.M. Low/Budgens case).
" When the offer is for cash and the offeror is a newly formed company
without sufficient capital requirements (for example, an off-the-shelf
overseas company), General Principle 3 is respected if the offeror and its
advisers have secured, at the time of the announcement of the offer, an
irrevocable commitment to furnish the funds from a bank or another
party upon whom reliance can reasonably be placed (rule arising from
the LuirdMerlin case).
The second rule states that, in this particular situation, at the moment of
the first announcement of a firm intention to make an offer, there is a
stronger obligation than that normally arising at the moment of publication
of the offer document. Generally, at the time of the first announcement, the
presence of a financial adviser is seen by rule 2.5 (a) of the Code as suffi-
cient to ensure that the offeror will be able to implement the offer; when the
offer document is posted, according to rule 24.7 it does not need to contain
an irrevocable commitment by a party to produce the funds, but must only
'include confirmation by an appropriate third party (e.g. the offeror's bank
or financial adviser) that resources are available to the offeror sufficient to
satisfy full acceptance of the offer'.
The detailed rule 9.6, which regulates the relationship between manda-
tory offers and dealings of directors, is an expression of the same principles.
The directors of a company can cause, by selling their shareholdings in the
same company, the threshold that necessitates the making of an offer (30%)
to be crossed only if they: (i) are sure that the new controller has an effec-
tive intention, and the capability, to fulfil the general offer required by rule
9 of the Code; (ii) manage the company during the offer, without leaving
their position until the end of the offer.
The means by which the rule seeks to achieve the desired result are differ-
ent from those employed by General Principle 3, since both those subject to
the rule and their obligations have special characteristics. In this case,
subject to the rule are the directors of the target company, but only because
they are acting in concert with the new controller and potential offeror. The
means used involve the imposition on the directors-sellers of a duty to
secure, as a condition of the sale, the fulfilment by the purchaser of the
obligation to make a general offer and the fixing of an exact day, until
which the directors must guarantee their services. Nevertheless, the aim of
the rule is, as in General Principle 3, to ensure that an offer (in this case, a
mandatory one) will be announced only if the potential offeror is seriously
prepared to implement it.
4. 'Last words': the deadlines for the offer and its revision
In the context of a takeover, the directors of an offeror are expected to
ensure full disclosure of the relevant information. (As we will see later on,
the situation is similar for the directors of the target.) It is certainly not easy
for the authorities to verify in advance compliance with this obligation, by
means of prior examination of the documents containing information or
through the other supervisory tools available to them. For this reason, the 42
Panel does not normally authorise the publication of documents ex ante.
The parties concerned must disclose information according to the General
Principles and the rules of fairness of the Code, and the Panel may later on
verify on a case-by-case basis whether the documents have been correctly
written and published.
Furthermore, the parties interested in a takeover may always change
their mind, or prepare several 'second best' solutions. In such cases, the
regulation of the time for disclosure can be useful. The establishment of-
inevitably artificial-deadlines for changes in proposals or opinions can
help the market and the shareholders to reach earlier than it would other-
wise be possible a complete understanding of the actual situation and to
decide on the outcome of the offer. For these reasons, the regulators recog-
nise that changes of proposals and opinions are possible, and also that 'late
discoveries' of hidden facts concerning the companies concerned might
occur, but, to safeguard the interest of shareholders and investors, impose
deadlines, before the lapse of which 'last words' must be pronounced.
We can find in the Code several examples of 'last' days. There is always
a possibility to 'consult' the Panel for exceptions, but the traditional empha-
sis of UK takeover regulation on flexibility does not reduce the importance
of respecting the time limits. For the offeror, the most important deadlines
are established by rules 30.1, 31.6 and 32.1. In addition, there are several
provisions that 'nail' the offeror to its words. This is, for example, the case
of rules 19.3 and 32.2.
C. Duties of the target's directors
1. General rule of disclosure and the fiduciary duties

In cases where the directors of the target company are approached by the
42 An interesting exception is the 'approval in advance' of the circular containing the

proposals to the General Meeting, if a potential controlling shareholder is seeking a waiver
from the mandatory offer (rule 9) through the Whitewash procedure (Appendix 1 to the
Code).
offeror, the requirements arising from the common law fiduciary duties
evidently become more important for the former than for the latter.
Relevant court decisions show how wide the scope is of the fiduciary
obligation of directors. 43 Even if the decision on the choice of a hypotheti-
cal buyer is left to them by the articles of association, this choice must be
fair and, unless there are very serious reasons, cannot prevent the share-
holders from making the best deal. In general, when a proposal for the
acquisition of a relevant amount of shares of the company is received by the
directors, the duty arises to communicate to the shareholders as soon as
possible the existence of the possible deal and to help them understand the
real worth of the proposal. 44 Non-disclosure or any behaviour which
reduces the ability of shareholders to evaluate the deal could be considered
as a use of the powers arising from the articles of association for an
'improper purpose'. Any other action with possible effects on the outcome
of the proposed deal may require a new decision by the shareholders (or, to
use the terminology of organic theory, from the organ that elected the direc-
tors, i.e. the general meeting), as we shall see in section IV.
2. The possible period of silence

The trade-off between mandatory disclosure and the need to effectively
negotiate the deal can lead the directors of the target to remain silent for a
period before disclosing the possible development to the shareholders. As
discussed above (section III.B.2), this will normally happen when the
offeror's strategy entails preliminary talks with the directors or board of the
target company.
As we have seen, rule 2 of the City Code tries to resolve this trade-off. In
particular, rule 2.3 divides the responsibility for disclosure between the
offeror and the offeree, leaving the duty to make an announcement to the
directors of the latter, if these have been informed by the directors of the
former. The events that can lead to disclosure are the same as those
mentioned in relation to the directors of the offeror (for example, untoward
movements on the market, circulation of rumours, or an increase in the
number of people 'in the know'). The directors of the offeree may decide to
make only a partial announcement, without, if possible, mentioning the
name of the potential offeror, if they think that this is preferable at this
stage of the talks (rule 2.6).
Even after the first announcement has been made by them or by the
offeror, the directors of the potential target company can maintain a some-
43 The decisions, cited in Gore-Browne on Companies, op. cit., n. 7, p. 27.006, concern

private companies (e.g., Munro v. Bogie [1993] GWD 14-912, or Savoy Corpn Ltd v.
Development UnderwritingLtd [19631 NSLR 138); but the rule can be considered a general
one.
44 See the decisions quoted supra, nn. 14 through 17.
what reserved position. The rules of the Code give them some time for the
preparation of a complete and exhaustive answer to the bid. 45 The initial
date of the relevant period is the posting of the offer document; conse-
quently, in a normal situation the directors of the target have more than a
month after the first announcement to prepare a complete opinion on the
offer (28 days being the time given by rule 30.1 to the offeror for the post-
ing of the offer document). However, they may not abuse this breathing
space, because rule 30.2 requires that they 'advise the shareholders of its
views on the offer as soon as practicable after publication of the offer docu-
ment'.
The time left to the directors of the target company may be seen as a
period of silence, if the deal is not a recommended takeover. If they are
involved with the offeror in the preparation and organisation of the deal,
the directors of the target will be substantially obliged to co-operate in the
writing of the offer document and providing shareholders with complete
and immediate information.
IV. THE APPROVAL OF THE SHAREHOLDERS AS A RULE OF FAIRNESS
A. When disclosure is not enough: the need for shareholders' approval in

company law
When mere disclosure of the facts is not sufficient for the protection of the
shareholders, fairness requires more than just a good choice of the time of
the disclosure: the directors must provide their shareholders with an
informed 'last word' on what the company must carry out.
One reason for such communication may be that the dimension or effects
of the proposed deal are too important and the interests of the sharehold-
ers too directly involved for the decision to be left to the discretionary
powers of the managers. The instrument used by UK law in such situations
is especially the approval of the director's behaviour; this approval can be
given before or after the relevant act or the relevant agreement, but the act
cannot have legal effects and the agreement cannot be executed if approval
is not obtained.
The possibility of ex post approval of the behaviour can be related to the
broader importance of ratification by the general meeting in English
company law. Ratification is the traditional instrument used to excluding
the liability of directors for their actions. 4 6 Thus, the company, with a
majority vote of the shareholders, can do or validate what the directors
45 See rules 30.2 and 31.9.

16 See North-West Transportation Co. Ltd (1887) 12 App. Cas. 589 (PC).
themselves cannot. The courts have created this rule in relation to situations
involving conflicts of interests of the directors. The similar principle now
applies by virtue of sections 320 through 322A of the Companies Act 1985
to transactions characterised by risk of conflict of interests, if their value
exceeds a certain amount, and to transactions entered into by the directors
for which no power is given to them by the company's constitution.
Shareholder's approval or ratification as a condition for the completion of
certain acts of the directors has been extended to other cases, such as the
promotion or frustration of a takeover offer, also involving transactions of
large value or a strong possibility of conflict of interests between directors
and shareholders.
The requirement that particular acts of the directors must be approved
by the shareholders is a traditional feature of company law. Nonetheless, it
has gradually been refined, to reflect the more advanced skills required of
company directors in a modern economy. In recent years, this requirement,
which at one time was little more than a formality which usually could be
easily met, has been transformed into a rule of fairness, which is considered
essential for good corporate governance and is enforceable both by the
company and by individual shareholders.
In particular, the way in which approval may be obtained has changed
to protect the interest of independent shareholders. The courts and, espe-
cially, the market authorities are nowadays well aware of the problem of
conflicts of interests. Consequently, the applicable rules now provide that
the majority authorising or ratifying the acts of the directors must be calcu-
lated without taking into account the votes of interested directors or share-
holders. This is not the general rule in common law or in the Companies
Act 1985. The exclusion of the votes of personally interested shareholders
was, for instance, denied in the North-West case in 1887. 4 7 The courts had
recognised the possibility of a derivative action brought by the minority on
grounds of use of 'unfair or improper means' for the adoption of the deci-
sion by the general meeting, or of 'oppressive' behaviour by the majority
'towards those shareholders who oppose it' (although neither was found to
exist in the specific case). In fact, the derivative action is still (together with
the possibility of relief for 'unfair prejudice') the legal instrument available
to the minority for the purpose of opposing the decisive participation of
personally interested persons in the vote authorising the directors'
48
actions.
47 Ibid.
48 For a more thorough discussion of the 'unfair prejudice relief', see supra, section II.B.3.
For an assessment of the available remedies in the presence of 'oppressive' behaviour by the
majority shareholders see supra, section lI.B.1.
B. Approval of the acts of the offeror's directors in the Listing Rules
The plainest manifestation of the rule of shareholder approval can be found

in the Listing Rules. These include, in chapters 10 and 11, the list of trans-
actions that need such approval and rules of fairness that must be respected
for the adoption of the relevant decision by the general meeting.
The relevant operations are so-called 'Class 1 transactions' and 'reverse
takeovers' (ch. 10) and 'transactions with a related party' (ch. 11). As made
clear in chapter 10, the relevant transactions principally consist in acquisi-
tions or disposals by a listed company. Obviously, the acquisitions can be
of other corporate entities or of businesses or assets; if relating to compa-
nies, they can be either private acquisitions or takeover offers. In the latter
situation, chapter 10 provides for special requirements of disclosure, espe-
cially with respect to offers which are not recommended by the board of the
target company (paras 10.45 through 10.50).
The special rules for Class 1 transactions and reverse takeovers are set
out in paragraphs 10.37 through 10.39. According to the general informa-
tion requirements, which are shared with Class 2 transactions (that is, of
5% or more), the company (as discussed above, section III.B.1) must
dispatch to the shareholders an explanatory circular and must obtain the
'prior approval of its shareholders in general meeting'. For Class 1 transac-
tions, it is possible that related agreements are entered into before the posi-
tive vote of the shareholders in the general meeting has been obtained, but
it must be a condition of any such agreement that it will not have any legal
effect without the vote. This possibility is not explicitly established for
'reverse takeovers'; probably the more serious effects of transactions of this
kind on the life of companies has led regulators to pay more attention to
the timing of the successive steps of the deal. Generally, if the transaction is
a takeover offer, the dispatching of the circular and the organisation of the
general meeting take place after the publication of the 'firm announcement
to make an offer' and before or, at the same time as, the posting of the offer
document.
Chapter 11 lays down the essential rules of fairness concerning the adop-
tion of the decision in the general meeting. This chapter widens the scope of
transactions needing shareholder approval, by including all transactions with
a 'related party' as defined, 4 9 with certain exceptions. The most important
exception waives the approval for 'small transactions', whose percentage
ratio, as referred to in paragraph 10.5, is less than 5% (para. 11.8).
49 The definition, given by para. 11.1 of the Listing Rules, is quite complex. In general,
directors, shadow directors, shareholders who own more than 10% of the issued capital
('substantial shareholders'), as well as their associates or related parties, are considered to be
'related parties'. The meaning of 'associate', the criteria for the calculation of shareholdings,
the relevance of past directorships and other detailed aspects are explained in para. 11.1.
The general rule on approval is substantially the same as the one underly-
ing chapter 10: the company must 'obtain the approval of its shareholders
either prior to the transaction being entered into or, if it is expressed to be
conditional on such approval, prior to completion of the transaction' (para.
11.4.c). If the related party is also a shareholder or has been given authority
by a shareholder, the company must 'ensure that the related party itself
abstains, and takes all reasonable steps to ensure that its associates abstain,
from voting on the relevant resolution' (para. 11.4.d). Thus, if a relevant
corporate acquisition is proposed or agreed between a listed company and a
related party, it must be approved, before or after the formal contract is
entered into, by the shareholders in a general meeting, without taking into
account the vote of the related parties, whether these are shareholder direc-
tors, substantial shareholders or third persons associated with them.
If the counterparty of the acquisition is not a related party, the deal must
be approved by the shareholders without any special rule concerning the
adoption of the resolution. The directors can vote if they are shareholders
('qua members'). Where a single shareholder or several shareholders acting
in concert control the company, they can also vote and determine the posi-
tive result of the meeting. Of course, all the rules of general application
concerning 'oppression of minority' or 'unfair prejudice' can be invoked by
the defeated shareholders, but the latter are not given additional remedies
by the rules of the market. In such cases, and with the aim of protecting the
disinterested shareholders, the rules of the market required disclosure of all
relevant information, so as to ensure a rational decision on the merits of the
proposed transaction and on the future of investment in shares of the
company concerned.
C. Approval of the acts of the target's directors in the City Code: the
passivity rule
In full harmony with traditional principles of company law (especially, the

'proper purpose' doctrine examined above, in section II.B.1), the 'passivity
rule' of the City Code-established, in particular, by General Principle 750
and rule 21s' -imposes, in the context of a takeover offer, an obligation on
the directors of the target company, which affects more their relationship
with the shareholders than that between their company and the offeror. In
so For the text, see supra, n. 5.

Si This rule includes a list of possible frustrating actions, which automatically come into
the scope of the General Principle, and makes provision for certain exceptions. The latter are
essentially justified by the existence of a formal contract entered into before the time of appli-
cation of the passivity rule. If a formal contract does not exist, the rule can be waived in pres-
ence of an obligation or other special circumstances, only with the consent of the Panel 'to
proceed without a shareholders meeting'.
this case, the market authority has clearly laid down detailed rules with the
aim of dispelling misunderstandings by the interested parties regarding the
requirements of fairness in a takeover bid, especially when the offer is not
recommended.
The purpose of the rule is explained in statements of the Panel itself:
[General Principle 7] prevents action being taken by directors which may bring the
interests of management into conflict with those of shareholders. It is an important
element in securing that shareholders be given the opportunity to consider a bid for
their company. It is because of respect for the interests of shareholders52that frus-
trating action is permitted if, but only if, it is approved by shareholders.
The main aim of the passivity rule is, therefore, to keep the decision53
concerning the results of the offer in the hands of the shareholders.
The contents of General Principle 7 and rule 21 of the City Code can be
examined from various perspectives: scope, relevant period, eventual
special majority.
1. Scope of the passivity rule

The different wording of General Principle 7 and rule 21 has caused some
doubts about the true scope of the 'passivity rule'. The duty to act only with
specific approval of the shareholders is of general value, and the relevant
operations cannot be limited to those listed in rule 21. 54 Thus, the behav-
iour of the directors is governed primarily by the General Principle. As else-
where in the Code, the specific rule must be understood as a form of
guidance for choosing the correct path; its transformation into a 'safe
55
harbour' would be unfair.
52 Taken from the statement on Minorco/Consgold (9 May 1989). See Weinberg and
Blank, op. cit., n. 6, p. 10038.
53 This is also the conclusion reached by L. A. Bebchuck and A. Ferrell, 'Federalism and
Corporate Law: The Race to Protect Managers from Takeovers' (1999) Columbia Law Review
1193, who note that '[t]he British regulatory system ... ensures that shareholders, not
management, have the ultimate say on whether a takeover proceeds'. As universally known,
this is not the main principle stated by the American law on defensive tactics; see principle 6.02
(a) of the 'Principles of Governance' of the American Law Institute.
54 Minorco/Consgold,in Weinberg and Blank, op. cit., n. 6, p. 10034.
55 The position of the Panel on this subject is well clarified by the following text, taken
from the statement of the Appeal Committee of the Panel concerning the application of
General Principle 7 and rule 21 in the offer of CE Electric UK plc for Northern Electric plc
(statement 1996/20, 23 Dec. 1996): 'The Code is based upon a number of General Principles,
which are essentially statements of good standards of commercial behavior. They are, however,
expressed in broad general terms and the Code does not define the precise extent of, or the
limitation on, their application. The Panel applies them in accordance with their spirit, to
achieve their underlying purpose. It is impracticable to devise rules in sufficient detail to cover
all circumstances which can arise in offers. Accordingly persons engaged in offers are made
aware that the spirit as well as the precise wording of the General Principles and the ensuing
rules must be observed. Moreover, the General Principles and the spirit of the Code will apply
in areas or circumstances not explicitly covered by any rule.' See Weinberg and Blank, op. cit.,
n. 6, p. 10157.
The problem has effectively arisen with respect to legal acts which are
not included in the list of rule 21. In its statement on Minorco/Congold,the
Panel noted that 'litigation could become a tactical weapon intended to
prevent a bid from being considered on its merits. All this could take place
regardless of the views of the shareholders who own the company ...
Shareholders should be entitled to decide whether such actions should take
place.' 56 The Panel, using an objective test, analysed the substance of the
antitrust proceedings in question, concluding that the action taken by the
board of the target company was calculated so as to prevent Minorco from
implementing its offer.
Of course, not every legal act should be equated with frustrating action,
but only those actions which can directly cause the offer to lapse. Every act
which can in fact directly frustrate the offer without the shareholders'
consent, can be considered unfair and inconsistent with General Principle 7.
There is no need for the consent to be given prior to the action, but
approval must exist at the time when the frustrating effect on the offer is
produced.
Applying these principles, in the Hoylake/BAT Industries case the Panel
reached a different conclusion. 5 7 In that case, the Panel considered that the
activity of lobbying the competent authorities on antitrust issues relating to
the offer did not amount to a breach of General Principle 7. Lobbying
cannot be considered as an action which can directly frustrate an offer;
instead, it involves the expression of opinions of no legal import to persons
not pushed to their decision by the activities of the lobby. Moreover, in the
Panel's view, 'irrespective of its effectiveness the lobbying of politicians is a
democratic right which it would be inappropriate for the Panel to inhibit'.
2. Relevant period
The time of application is an essential feature of the passivity rule. The 'D-
day' is established without regard to public knowledge of the offer or to the
existence of a legally binding commitment of the offeror. The triggering
factor is the knowledge of the potential target company's directors concern-
ing the offer and the seriousness of the intentions of the offeror.
Thus, the directors are prevented from engaging in frustrating actions at
all times after becoming aware of a serious possibility of a bona fide offer.
The period of relevance confirms once more the essential nature of the
passivity rule: it is a duty owed by directors to shareholders, not a rule
which favouring the offeror as against the offeree. Theoretically, although
the shareholders may be unaware of the potential offer, the freedom of the
56 MinorcolConsgold,in Weinberg and Blank, op. cit., n. 6, p. 10036.

57 Statement of the Panel in Hoylake Investments Ltd/BAT Industries plc (1S Sept. 1999).
See Weinberg and Blank, op. cit., n. 6, pp. 10102-10103.
directors is restricted. However, the possibility of ratification gives the
directors an opportunity to carry out defensive actions immediately, espe-
cially if they are confident that the shareholders' trust in them will be recon-
firmed in the general meeting.
It is not easy to define exactly what 'bona fide offer' means. Nonetheless,
a transaction for the completion of which the offeror is making serious
efforts, respecting, or being prepared to respect, in full the relevant market
and company law rules concerning authorisations, announcements, the
procurement of independent advice, etc., would probably be considered to
be bona fide. Moreover, the acting directors of the target company bear the
burden of proof with regard to establishing the offeror's bad faith or lack
of serious purpose. To meet this burden, they must demonstrate that the
promises given to the market by the offeror are unlikely to be respected or
that the offeror is acting only with an intention to disturb the affairs of the
target company.
3. Special rules for the adoption of the resolution

No special rules apply, and no special majority is required, for the approval
of the resolution on defensive tactics. However, if the defensive tactic is
implemented through a transaction with a related party, then the rules
governing this type of transaction are applicable.
A further limitation on the vote of interested persons can be found in
rule 18 of the Code, which regulates 'the use of proxies and other author-
ities in relation to acceptances'. This rule forbids the appointment of prox-
ies as a term of the acceptances to an offer; use of proxies is effective only
if the offer has become wholly unconditional. Accordingly, the offeror
cannot exercise voting rights of shareholders who have assented to the
offer, unless the positive outcome of the offer has been previously secured.
This excludes the possibility that the offeror will vote as a proxy in a
general meeting, held in accordance with General Principle 7 and rule 21,
for the purpose of authorising the defensive tactics. This rule does not
affect the ability of the offeror to vote to the extent that it personally owns
the shares in question.
V. CONCLUDING REMARKS
The preceding analysis leads us to some final thoughts. Two of them are
closely related to the operations of the rules examined above, in sections III
and IV. The remaining two concern the choice between general and detailed
rules and the relationship between company law and securities regulation.
These are problems presently facing all European countries, as a result of
the increasing significance of financial markets for their economy.
Director'sDuties in UK CorporateAcquisitions
1. Flexibility of the rules concerning the timing of disclosure

As seen in section III, in general, the time of disclosure of a corporate acqui-
sition must coincide with the first moment at which it is possible to deliver
information to the public without seriously jeopardising the outcome of the
transaction. However, the late disclosure of information in the interest of a
successful outcome of the transaction is banned whenever there is a serious
risk that the good conduct of the market would be badly affected by contin-
uing silence.
In fact, if the acquisition is private, but public companies are involved,
the moment of mandatory disclosure normally coincides with the conclu-
sion of an agreement on the terms of the transaction between the parties,
even if this agreement is not legally binding. Until this moment, the publi-
cation of information can disturb the negotiations in course and cause some
confusion on the market. To avoid violations of secrecy, the delivery of only
partial information is possible, but the parties must ensure a fast conclusion
of their negotiations.
If the acquisition is implemented through a public transaction (i.e.,
mainly if it is a takeover offer), disclosure generally becomes mandatory
when the acquiring party or its directors decide to launch the offer, after
gathering sufficient information to be able to rationally put aside any resid-
ual doubts about it. Before this moment, they can carry out all steps consid-
ered necessary in order to reach their decision (e.g., they can choose
whether or not to discuss the terms of the offer with the directors of the
target company); and must carry out all steps necessary in order to ensure
the fairness and accountability of their announcement. On the other hand,
any wasting of time may necessitate, if particular events occur, to an antic-
ipatory disclosure on the part of the potential acquirer or, sometimes, of the
discussing directors of the target. This disclosure can be temporary or
incomplete (e.g., may consist in the announcement of a possible offer) if
there are talks in course between different parties, but it must be complete
if only one party (the potential acquirer) has control of the situation.
2. Shareholderapproval as a rule of fairness

The discussion in section IV, supported by the outline of the relevant rules
of company law in section II, has shown that the need for the shareholders'
approval for some important transactions is essentially a rule of fairness,
binding the directors. Essentially, the rule can be expressed as follows:
whenever they consider that a transaction will change the nature of the
investment or will have a direct effect on a deal proposed by a third party
to the shareholders, the directors must ask for a new authorisation. The
percentage ratios and list of affected operations set out in the rules simply
individuate this general principle.
Potential conflict of interests between directors and shareholders is the
main reason justifying the requirement of approval by the general meeting.
Different forms of such conflict lead to different regulatory solutions
regarding the adoption of the resolution: if the conflict is real and effective
(e.g., in the context of transactions with a related party), the directors or
'substantial' shareholders of a listed company cannot exercise their voting
rights at the general meeting; if the conflict is only potential (e.g., arising
from fears of loss of one's job under a new controller), the directors cannot
decide qua directors, but may exercise their voting rights as shareholders, if
they are the owners of shares.
3. General rules and detailed rules

In the text of the regulatory rules examined above, it is possible to detect a
continuous attempt to strike a balance between flexibility and detail. There
are general rules of fairness and disclosure (for example, the General
Principles of the City Code, or the general rule of disclosure established by
chapter 9 of the Listing Rules), but also specific rules, allowing different
behaviour with respect to different situations (depending, for example, on
whether a takeover offer has been previously discussed with the offeree or
not, or on whether untoward movements on the market may occur or not).
Finally, there also rules containing lists of relevant facts or actions (e.g., the
list of frustrating actions in rule 21 of the City Code), which are often useful
as signposts for the market activities of the interested persons, but are not
exhaustive.
Frequently, the detailed rules are accompanied by exceptions, sometimes
directly provided for in the text, sometimes left to the discretionary power
of the market authority. Broadly speaking, the detailed rules are effective
only in so far as the general principle implemented by them is respected. If
the application of a specific rule would go against the spirit of its parent
general principle, the system provides for such application to be avoided.
4. Company law and securities regulation

The rationale of rules on the relationship between directors and sharehold-
ers established by general company law and by the market regulators may
be very similar, but often their content is quite different. Three examples
would suffice: the difficulty in applying the unfair prejudice remedy to a
public company (section II.B.3); the different treatment of the vote of
related parties in the approval or ratification of directors' dealings by
general meetings (section IV.A); and the explicit operation of the passivity
rule only for the companies to which the City Code is applicable (section
IV.C).
In the first case, concern for the interest of all shareholders in their
capacity as investors, typical of the regulation of financial markets and
listed companies, reduces the value of a remedy founded on the personal
position of the shareholder and on the risk that this can be seriously harmed
by a particular use of the company constitution by dominant shareholders
or directors.
In the second case, the value that financial markets place on the rapid
resolution of legal problems has led to the improvement of the general prin-
ciples of company law by means of a simple rule: 'the related party should
not be permitted to vote at the meeting' (Intro. to ch. 11 of the Listing
Rules). This objective rule is more easily applicable than judicially devel-
oped protections of shareholders in common law, such as the duty not to
contract in case of conflict of interests or the impossibility of ratification if
this amounts to oppression of the minority.
In the third case, the common law had created, with the 'proper purpose'
doctrine, a serious obstacle to overreaction by directors to hostile
takeovers. The traditional rule denies to directors the freedom to act with
the purpose of promoting or hindering a takeover bid, without further
examination of what would be the interest of the company; the decision on
the outcome of the takeover is actually left to the shareholders. This seems
more effective than, for example, the rules still in force in the US, 5 8 such as
the complex mediation between interests recently established by the courts
of Delaware with the 'reasonable response' doctrine, or the complex exam-
ination of the 'primary purpose' of the action (i.e., whether the determinant
factor has been the interest of the company or that of the directors them-
selves), which was the prevalent position of American courts prior to the
change in the Delaware position. Even so, the market authorities-and
especially, of the City Panel-have taken the view that the good conduct of
the market and the protection of investors are not sufficiently secured by
the legal rule, whose applicability can often be in doubt. For this reason,
they have adopted a narrower passivity rule, compiled a list of clearly rele-
vant defensive actions, and laid down an exact indication of the relevant
time of application.
The conclusion to be drawn from these three examples is the same: the
presence of the companies on the market creates a need for clear and readily
58 The general position of American law on defensive tactics can be found in the
'Principles of Corporate Governance' of the American Law Institute (ALI), which represent an
effort of synthesis of the best principles arising from the practice of the courts and state and
federal lawmakers. Principle 6.02 (a) establishes that 'the board of directors may take an
action that has the foreseeable effect of blocking an unsolicited tender offer, if the action is a
reasonable response to the offer'. Some disputes exist about the burden of proof regarding the
reasonableness or unreasonableness of the response. In the ALI principles this burden is placed
on the party challlenging the action of the directors. In current Delaware law, however, as
established by the decisions in Unocal v. Mesa Petroleum Co. (1985)and Paramount
Communications, Inc. v. Time, Inc. (1990), this burden is placed on the defending directors.
See R.J. Gilson and B.S. Black, The Law and Finance of Corporate Acquisitions (New York,
1994), pp. 821 ff.
applicable protections for disinterested shareholders, including in relation
to the corporate organisation. This justifies a different division of powers
between directors and shareholders, in favour of the shareholders.5 9 This is
particularly the case where a proposed acquisition, with regard to which the
company is either offeror or target, is being carried out.
The UK response to this need for special regulation has been, especially
in the context of corporate acquisitions, to rely on special rules, made by
the market authorities. Obviously, a solution of this type can be effective
only to the extent that the authorities' enforcement system is also effective.
59 The emphasis on the interests of the shareholders is also confirmed by rules that explic-
itly give importance to other kinds of interests. For example, the General Principle 9 of the
City Code finds in 'the shareholders interests taken as a whole, together with those of employ-
ees and creditors, which should be considered when the directors are giving advice to the
shareholders'. Thus, the interest of different stakeholders is considered, but only for the
purpose of advising the shareholders, to which the final resolutions are left.

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Bluebook 21st ed.

ALWD 7th ed.

APA 7th ed.

Chicago 17th ed.

McGill Guide 9th ed.

AGLC 4th ed.

MLA 9th ed.

OSCOLA 4th ed.

Division of Legal Counsel, Commissione Nazionale per le Societi et la Borsa (Consob),

UK regulation affecting the duties of fairness owed by the directors to the

II. LEGAL DUTIES OF DIRECTORS AND THEIR RELEVANCE FOR CORPORATE

A. Establishing the relationship between legal rules and rules of the

B. General overview of the relevant legal rules

1. Fiduciaryduties and their enforcement

2. Evolution of the duties of care, skill and diligence

15 Heron InternationalLtd v. Lord Grade [1983] BCLC 244.

3. The 'unfairprejudice' remedy

4. Other relevant sections of the Companies Act 1985: liability,removal

III. THE TIME OF DISCLOSURE AS A RULE OF FAIRNESS

A. The general problem

B. Duties of the offeror's directors

1. General obligation to disclose and its practicalimplementation by the

33 Only the FSA Listing Rules regulate this special matter.

2. Special rules concerning the 'announcement of a firm intention to

37 See, e.g., rule 23 of the Code.

3. The duty to make only serious announcements

C. Duties of the target's directors

1. General rule of disclosure and the fiduciary duties

42 An interesting exception is the 'approval in advance' of the circular containing the

2. The possible period of silence

43 The decisions, cited in Gore-Browne on Companies, op. cit., n. 7, p. 27.006, concern

IV. THE APPROVAL OF THE SHAREHOLDERS AS A RULE OF FAIRNESS

A. When disclosure is not enough: the need for shareholders' approval in

45 See rules 30.2 and 31.9.

The plainest manifestation of the rule of shareholder approval can be found

In full harmony with traditional principles of company law (especially, the

so For the text, see supra, n. 5.

1. Scope of the passivity rule

56 MinorcolConsgold,in Weinberg and Blank, op. cit., n. 6, p. 10036.

3. Special rules for the adoption of the resolution

1. Flexibility of the rules concerning the timing of disclosure

2. Shareholderapproval as a rule of fairness

3. General rules and detailed rules

4. Company law and securities regulation

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